Several
breakthrough reforms with pertinence to the Indian real estate sector saw the
light of the day over the last one year. Be it demonetization – the
Government’s ‘surgical strike’ against black money - the revolutionary RERA or
the unified tax regime of GST - all bore the power of rendering the Indian real
estate sector more transparent and professional.

The
upward trajectory of consumer sentiment is a strong indicator that the market
has responded well to these reforms. The incumbent Government has embarked on a
determined journey to transform the Indian realty sector into a more wholesome
industry.

While
the primary and secondary residential markets undoubtedly benefited from the
plethora of reforms, the rental market has also received a shot in the arm.
Various reforms and announcements made over the last one year can potentially
boost this crucial segment of the Indian real estate sector:

April
2017: An End to Fake Rent Receipts

Under
Section 10(13A) of the Income Tax Act, employees can avail tax exemption under
House Rent Allowance (HRA). Hitherto, employees merely needed to submit rent
receipts to avail this benefit, along with the landlord’s PAN details if the
rent amount exceeded Rs 1 lakh per annum.

However,
with its decision to cap the loss on second property purchased with a home
loan, the Government has effectively plugged a tax loophole used by innumerable
employees for tax exemption. As per the recent tribunal ruling, the assessing
officer can now demand proof – such as the leave and licence agreement, and a
letter to the housing co-operative society informing about the tenancy,
electricity bill, water bill, etc.

This
new ruling has cracked down on the practice of salaried employees submitting sham
rent receipts.

June 2017:
Withholding Tax

The
new section (194IB) introduced in the Income Tax Act makes it mandatory for
individuals paying monthly rent of more than Rs 50,000 to withhold
taxes at 5% on rental payments, and to deposit this amount within a prescribed
time.

Prior to this amendment, individuals were not required to withhold such
tax. This new section has been inserted to widen the scope of TDS (tax deducted
at source).

With
this, landlords receiving higher income as rent will come under the tax
scanner. They will now be liable to report the full rental income in their tax
returns in order to claim benefit of the TDS amount. Moreover, with the recent
linking of PAN and Aadhar numbers, the chances of malpractices going unnoticed
have reduced drastically.

The
winds of change have clearly started to blow post-demonetisation. Both tenants
and landlords now prefer to keep their transactions clean by not indulging in
any cash payments. Moreover, tenants have also become more vigilant regarding
the rental agreement and rent receipts.

July 2017:
Model Tenancy Act

To
replace the obsolete five-decade old Buildings (Lease and Rent Control) Act,
the State Cabinet of Tamil Nadu announced its intention to bring in a law based
on the Model Tenancy Act circulated by the Central Government.

The new law aims
to balance the rights and responsibilities of both the landlords and tenants.

Some
of the salient features of the law:

Mandatory
registration of all rental agreements over 11 months

Restriction
of security deposit amount to three months’ worth of rent

Limiting
of tenants’ right to continue residing after the lease period to six
months.

With
a balanced law in place, many more home owners are expected to come forward and
let out their properties.

Why
Has Rental Housing Not Taken Off?

Despite
its immense potential as a market force, why has the Indian rental housing
segment has not made consummate headway?

The primary reason is that it is a
largely unorganised sector, and developers do not find building project
exclusively for rental purpose a very viable business proposition. Moreover,
the cost of building a house is way higher than the rental returns they can
expect, considering the rental yields that Indian cities fetch.

Also,
historically, the stringent pro-tenant laws of the State-enacted Rent Control
Acts (RCAs) have prevented landlords from renting out their properties. The
Tamil Nadu government is now paving a way for a balanced rent control
act.

Also, a fast-track court mechanism to handle eviction disputes
is expected to revive the rental housing market in India. Repealing rent
control will boost the confidence of property owners with an eye on rental
returns, and thereby help unlock vacant units.

What
More Needs to Be Done?

Over
the past few years, the country has seen a cultural and socio-economic shift.
From 5.5 million to 9 million a year, migration of people in pursuit of better
education and career opportunities in Indian cities from rural and peri-urban
areas has almost doubled in the last ten years. This directly pushes up the
demand for rental housing.

Also,
it by now is an emerging market reality that many of India’s millennials prefer
to rent rather than buy homes - largely because the property prices in most of
the metropolitan cities are not affordable, and also because the rental option
can provide better location advantages. Apart from the economic factors, rental
housing comes with the benefit of ease and flexibility for the fast-paced Ola
and Uber generation.

The
Government, with its ambitious ‘Housing for All by 2022’ mission, is also half
way through its tenure, and the pace of housing construction is still far
behind schedule. It is a distinct Indian paradox that despite the acute housing
shortage, approximately 11 million units lie vacant and unused. Clearly,
efficient use of this existing inventory via rental housing (in markets where
trunk infrastructure is in place) would ease some of the pressure.

In
fact, the draft National Urban Rental Housing Policy aims to alleviate housing
shortage in urban areas by encouraging renting out of these vacant homes across
the country. Residential REITs are can also ease the mounting unsold inventory,
as they have done in countries like the United States.

The
Central Government is now planning to launch a ‘rent to own’ scheme under the
National Urban Rental Housing Policy which will let people rent homes from
Government institutions. Under this scheme, people will have the option to buy
the home they have rented by paying the full price in easy instalments.

While
the Government has started the engine, it is now high time to floor the
accelerator and fully explore and unbox the massive potential of rental housing
in India…

Reforms Redefine the Indian Real Estate - April 2017: An End to Fake Rent Receipts
Reviewed by S. Chitra
on
September 18, 2017
Rating: 5 Rental Reforms Redefine the Indian Real Estate Sector High time to fully explore and unbox its massive potential by Mr. Anuj Pur...